New BTC Brief: Taxes can (and often do) create jobs

A new report from the NC Budget and Tax Center finds that state and local taxes, by funding proven public investments and services, can be important tools for creating jobs both now and in the long term.

The evidence from credible economic research demonstrates that using state and local tax dollars for public investments in education, transportation, public safety, and health helps to create jobs and increase household income by reducing business costs and increasing worker productivity.

In the short term, especially in times such as now when such a large share of adults are out of work, mainstream economic theory and industry-standard economic modeling indicate that tax-financed services and investments often create jobs and spur economic growth: raising additional tax revenue is likely to put more money to work in a state’s economy. That’s because much of the additional tax revenue would otherwise have been saved or spent on imported goods and services that have little direct benefit for a local economy. Using additional tax revenue to hire teachers, first responders, nurses, and construction workers will put money directly to work back in the local economy.

In the long term, spending on upgrading and maintaining highways and railroads, educating children and training workers, and improving public health and safety makes the entire economy more productive. A recent survey of the literature by economist Jeffrey Thompson documented a considerable body of research showing that tax-financed investments in infrastructure, public education from preschool to higher education, and public health and safety can result in stronger local and regional economies.

The majority of credible studies have found that reducing state and local taxes has, at most, a small positive impact on job creation and economic growth and only in cases when tax cuts haven’t adversely impacted public services. Because of balanced-budget requirements, however, state and local tax cuts almost always must be paid for with cuts to public investments that support jobs and strengthen the state’s economy.

Furthermore, most studies have shown that the modest benefits of state and local tax cuts on economic growth take a long time to materialize and mostly result from large firms relocating from other states. In contrast to tax cuts, increasing public investments creates jobs and generates better economic outcomes for individual states and the nation as a whole.

Insomuch as the economic future of individual states rests on the economic strength of the nation as a whole, state policymakers would be better advised to adopt an economic strategy focused on high-quality public investments rather than a “beggar thy neighbor” approach of state and local tax cuts.

North Carolina’s own history is an example of the critical role of public investments in building a strong economy.

Sound public investments in schools, hospitals, colleges and universities, and a modern transportation network were critical to propelling North Carolina from one of the most impoverished states in the country to become a leading economy by the end of the 20th century. Only by building on North Carolina’s long history of investing in its people will the state emerge from the Great Recession in a position to thrive and compete in the global economy.

3 Comments

Jimmy

October 27, 2011 at 8:17 am

Not sure what you are saying with this article. Obviously, we pay state taxes to get basic services such as education, highways,etc. If we decide to tax more to “create” jobs that are not vital, then we begin to run into problems. A good example is California, a very high-taxed, highly regulated, highly unionized when it comes to public sector jobs. For these reasons, businesses have left the state in droves, unemployment is extremely high,and the state is essentially going broke. In the past, the state has showered the public sector with so many benefits and excessive pay that unfunded future liabilities cannot possibly be met. I’m not sure California would support your theory of creating jobs.

Ed McLenaghan

October 27, 2011 at 9:03 am

The main point is that compared to current levels of public investments, states (particularly low-tax states like North Carolina) would get more bang for their job-creating-buck by raising additional revenue to fund targeted, proven strategies for strengthening the economy.

For a more comprehensive list of specific public investments that are likely to have a particularly positive impact on short- and long-term economic growth, I’d recommend reading the entire report as well as the report I cited above by Jeffrey Thompson (also see link below).